As has been widely reported - The Chancellor in his budget announced that the DRO fee of £90 is being abolished, the value of car allowed was doubling from £2k to £4k and the total unsecured debt allowable was increasing from £30k to £50k.
On the face of it this is good news and many have been quick to celebrate it. I was happy to see the car allowance increased and the fees abolished, however, I have a nagging doubt that we may not be celebrating in a year’s time – why?
It is that pesky law of unforeseen consequences; This law applies when someone does something without perhaps thinking it through very carefully. It is often cited in relation to decision made in election years.
If I have learnt anything after 30 years in this industry it is that debt solutions need to be effectively regulated. £80 of the £90 fee was allocated to The Insolvency Service to cover the cost of supervising this debt solution.
Working on a conservative average of 3,125 DROs a month, this would have provided over £3m of revenue each year for the Insolvency Service to effectively supervise this debt solution. Craig Simmons, formerly of Money and Pensions Service and the Financial Conduct Authority, suggests in his response Kevin Still's Blog (see below) that this will be covered by the government.
The stats
For individuals in England & Wales, the total number of insolvencies in January 2024 was 8,089, 4% higher than in the same month in the previous year (7,756 in January 2023).
The individual insolvencies consisted of 768 bankruptcies, 2,793 debt relief orders (DROs) and 4,528 individual voluntary arrangements (IVAs).
DRO and bankruptcy numbers in 2023 were higher than in 2022, although the number of bankruptcies remained well below pre-2020 levels.
The statistics show 31,717 DROs in total for 2023 an increase of 25% year-on-year. March 2023 being the peak month with 3,383 DROs.
I haven't seen any visible announcement from the Chancellor that the government would provide an additional £3m of funding for the Insolvency Service to cover this loss of revenue.
I have made some enquires to establish if suitable arrangements / assurances have been made to replace this funding shortfall. I very much hope that this will be the case.
Allowable unsecured debt
My other nagging doubt centres around the increase to the total debt allowable from £30k to £50K.
There was a thorough consultation before the last increase in allowable debt levels in June 2021 for DROS and many concerns was raised then.
Whilst there was support for both increasing the car value and abolishing the application fee (subject to suitable alternative funding of the Insolvency Service) - there was little suggestion of the need for an increase in the total debt levels.
My concern about this level of increase is what impact this will have on the cost and availability of credit for those who need it.
If a lot more credit is written off via DROs then those who pay for their credit will simply end up covering that loss, just as we do with our utility bills.
It would be a classic example of the law of unforeseen consequences if in trying to help those in debt the Chancellor had in fact increased to cost and reduced the availability of credit for those who need credit the most. The demise of the home credit market has shown what happens when the combination regulation and claims management activities erode financial resilience and the viability of previously sustainable business models. The risk of increased usage of loan sharks was repeatedly flagged by trade bodies and impacted firms.
My co-director of Consumer Duty Services, Kevin Still, posted an article on the DRO change at the weekend ahead of our Credit Union and Community Banking event on 19 March. This sector often engage with members in the bottom quantile of UK society. Will this influence their risk appetite going forward?
As former Head of Insolvency Services at StepChange Debt Charity, we can reflect on the consequences of consolidating to two DRO hubs as volumes rise, where the 2 largest debt solution providers (i.e. StepChange and PayPlan) no longer administer DROs.
The Financial Conduct Authorityreminded 'Fair Share' providers to consider their financial resilience in their "Dear CEO" letter of 21 February 2023. This was based on the status quo being maintained in terms of the proportional volume of 'Fair Share' funded DMPs and IVAs relative to the number of debt advice sessions. IVA volumes have already dropped significantly in 2023 relative to 2022.
As we prepare for a major creditor event (sponsored by Consumer Duty Services) on 27 March 2024, attended by creditors, debt buyers, voting agents and regulators, we can reflect on the impact of the Consumer Duty and other regulatory interventions.